More Boards Publicly Back Besieged CEOs

Former BP CEO Tony Hayward in 2010, just months before the Gulf of Mexico oil spill.
Reuters

By

Joann S. Lublin

Updated Dec. 18, 2012 10:03 p.m. ET

When the chief executive comes under fire, corporate boards are increasingly proclaiming their support for the embattled leader—even though the endorsement might be short-lived.

During 2012, the boards of several big companies, including Procter & Gamble Co., Research In Motion Ltd., PepsiCo Inc.,News Corp., Credit Suisse Group AG and Veolia Environment SA, took the unusual step of issuing statements backing their CEO. Rallying around a besieged chief can calm employees, lift a depressed stock price and borrow time so that he or she can deliver on a risky strategy.

Management experts say the trend shows, in part, how boards are coping with harsh criticism from vocal hedge-fund investors. "To resist such activists' push for short-term remedies, highly visible and accountable boards are stepping into that communication arena more than ever before," says Paul Winum, a senior partner at RHR International LLP, a Chicago management consulting firm.

ENLARGE

P&G chief Robert McDonald, shown last year.
Associated Press

Then again, directors' declarations don't always have the intended effect. Outsiders often view them as the kiss of death for a sitting CEO.

Consider WellPoint Inc. A disappointing quarterly earnings report on July 25 sharpened concerns about CEO Angela Braly and caused the health insurer's share price to sink 12% to its lowest close since September 2010. The board "is supportive of the strategy and our management team," Jacquelyn Ward, then its lead independent director, said in a statement released the same day.

The statement enraged stockholders already clamoring for Ms. Braly's ouster, said Robert W. Medway, co-managing partner at Royal Capital Management LLC, a hedge fund that held 837,800 WellPoint shares as of June 30. "It added a lot of gasoline to the fire."

Royal Capital soon wrote the board castigating Ms. Braly's performance and demanding it bring in new blood. In late August, she resigned.

Reached at her Indianapolis home, Ms. Braly declined to comment on the episode.

WellPoint directors "were very careful" in crafting their support statement, and didn't mention the CEO, says a person with knowledge of the matter. Mr. Medway thinks the omission "left them a little wiggle room."

Similarly, BP PLC publicly stuck by Chief Executive Tony Hayward in the summer of 2010, with a spokesperson confirming the board's support to the press two days before the announcement of his planned exit.

His departure from the energy giant had been widely anticipated, given the widespread criticism of his response to the U.S.'s largest offshore oil spill.

Mr. Hayward declined to comment, a spokesman said.

David Nicholas, a BP spokesman, says the board did indeed have "full confidence" in Mr. Hayward—at the time.

"A board that publicly backs its leader risks looking either foolish or incompetent if circumstances require the board to remove a CEO shortly thereafter," warns Allan Grafman, chairman of Majesco Entertainment Co. and head of All Media Ventures, which advises media investors. "Boards should think twice and almost never do this," he adds.

In BP's case, "the board's reversal cost them credibility," says Thomas Lys, a governance specialist and accounting professor at Northwestern University's Kellogg School of Management.

A person familiar with the situation says the comment "is a fair criticism" because BP directors later became unhappy over how management handled public relations following the spill.

At P&G, directors' public show of support has so far helped CEO Robert McDonald to weather criticism. Activist investor William Ackman was pressing him this summer to improve sluggish results at the consumer-products giant after Bloomberg News reported that directors were considering a possible leadership change. In a regulatory filing days later, independent board members said they unanimously backed Mr. McDonald and his turnaround plan while "monitoring its effectiveness."

The filing "was the most efficient way of setting the record straight," says Paul Fox, a P&G spokesman. Through Mr. Fox, Mr. McDonald declined to comment.

The board's statement "is a stay of execution," says William Schmitz, an analyst with Deutsche Bank Securities Inc. "It bought [Mr. McDonald] some time to make this plan work." Nevertheless, he adds, "the guy is a marked man as far as Mr. Ackman is concerned."

Mr. Ackman declined to comment.

At Yahoo Inc. last year a vote of confidence from a key director gave CEO Carol Bartz a brief reprieve. "This Board is very supportive of Carol and the management team," Chairman Roy Bostock told the Internet company's annual meeting in late June 2011. His endorsement improved employee morale and sparked several positive employee emails, Ms. Bartz recalls.

Weeks later, Mr. Bostock fired Ms. Bartz over the phone. Directors ousted her because she failed to meet annual goals they had set for her earlier that year, such as reviving the company's share price, people with knowledge of the situation have said.

Mr. Bostock, who left Yahoo's board in May, declined to comment. "Boards support their CEO until they don't," Ms. Bartz says.

Because boardroom dynamics can shift suddenly, investors should take a wary view when directors trumpet their support for a troubled CEO, according to several leadership coaches and other consultants. That's why some boards prefer to stay mum.

Groupon Inc. directors met Nov. 28 amid reports by The Wall Street Journal and Bloomberg News that they would consider whether to replace Chief Executive Andrew Mason. The head of the embattled Chicago-based daily-deals website remains at the helm, despite pressure to reassure skeptical investors of the company's growth potential.

Board members didn't publicly affirm their support of Mr. Mason after the meeting because "Groupon does not comment on rumor or speculation," says Paul Taaffe, a company spokesman.

For his part, Mr. Mason recently declared he would "fire myself" if he thought he was no longer the right for the job.

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